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Flat Tax A Success In Iceland

by Amanda Banks,, London

14 August 2007

The Center for Freedom and Prosperity Foundation last week released a report on the dramatic flat tax and supply-side reforms that have taken place in Iceland, boosting growth, efficiency, and competitiveness.

Entitled "The Iceland Tax System -- Key Features and Lessons for Policy Makers," the study is authored by Dr. Hannes Gissurarson a Professor of Politics at the University of Iceland and Dr. Daniel Mitchell a Senior Fellow at the Cato Institute. Gissurarson and Mitchell found that the flat tax, a low-rate 18 percent corporate income tax, a 10-percent flat tax on capital income, and repeal of the wealth tax have dramatically boosted Iceland's economy, reversing the stagnation and instability that plagued the nation in the 1980s.

The reforms in Iceland have yielded big dividends. Iceland is a rich and successful nation. The three biggest reforms are the low corporate tax rate, the low-rate flat tax on capital income, and the intermediate-rate flat tax on labor income. The authors find considerable evidence that the first two reforms have been very successful. Indeed, they also find it is quite likely that the lower rates have generated significant Laffer Curve effects – meaning the government collects more revenue at a lower tax rate. These observations and many others are discussed in CF&P Foundation's recent study on Iceland's tax system, which is the fifth research paper in a series of studies examining different tax systems from around the world

Andrew Quinlan, CF&P Foundation, said: "The CF&P Foundation study illustrates the wisdom of good tax policy. Iceland has slashed tax rates on productive activity and its economy is booming. The Center has undertaken this project reviewing the tax system of other countries in hopes that policy makers learn from the important tax changes that are taking place around the world."

Daniel Mitchell, The Cato Institute, said: "Iceland's supply-side reforms are further evidence that lower tax rates boost economic performance and create economic opportunity. If policy makers can build upon this success by further lowering tax rates and reducing the burden of government spending, there is every reason to suspect that Iceland will be one of the world's most prosperous nations."

Veronique de Rugy, Mercatus Center, said: "Politicians from high-tax nations such as France and Germany should visit Iceland and see that dramatic tax-rate reductions increase economic growth and boost job creation."

Over the next few months, the CF&P Foundation will release several more papers reviewing the tax systems of selected countries. The next study will examine the tax system of Russia. There are plans to issue studies on the tax regimes of Ireland, France, and the United Kingdom. The four previous published papers in the series were on the tax systems of Sweden, Slovakia, Switzerland and Hong Kong.

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